The historic U.S. Presidential Election has now concluded with Donald J Trump the winner. The bold message of his campaign and its unconventional path faced difficult odds, but his ultimate prevail speaks to the global phenomenon taking hold focusing on nationalism, populism seeking to replace establishment politics, and countering political correctness. With Republican control of both the House and Senate, his ability to enact change and new legislation is increasingly likely. While his exact policies have yet to be fully developed and communicated, he has and will likely continue to surround himself with strong economic advisors and Republican lawmakers that will promote pro-growth economic policies for the country.
Over the course of the next few months, we expect the new administration to communicate details of its agenda and policies. The Trump administration’s business-friendly policies include corporate and personal tax cuts, repatriation of off-shore cash from multinationals and rolling back stifling regulation for businesses. In addition, he is likely to seek to invest in building the nation’s depleting infrastructure through a large infrastructure program and increase defense spending to rebuild the military and its status. Thus, his policies appear to favor defense and industrial companies, commodities, financial services companies while less focused on punitive regulation of healthcare companies and drug price regulation. Trump’s desire to protect U.S. manufacturing may negatively affect multinationals with significant manufacturing outside the U.S. and result in weaker support for renewable energy.
Trump’s pro-growth policies will likely be moderated by fiscally conservative Republicans who seek to keep public finances in check and seated Democrats who will also need to be part of the large coalition to get significant legislation passed. The impact of lower taxes and higher spending without offsetting austerity will mean higher deficits and debt levels leading to higher bond yields, a pick-up in inflation and a strong U.S. dollar. This will negatively impact bonds, in a time of general investor complacency to the risks of bonds with a record $1.4 Trillion of net flows into the asset class since 2009 versus $150 Billion in net flows out of domestic mutual funds over the same period. Higher interest rates with corresponding reasonable economic growth make equities an attractive alternative to bonds, especially those with low valuations and growing income streams. In prior periods of rising rates, Value and High Dividend strategies have performed well relative to the overall market.